State of Wisconsin Investment Board (SWIB) Trustees awarded incentive compensation based on $1.9 billion of net outperformance generated by SWIB staff over last five years for the fully funded Wisconsin Retirement System (WRS). Due to SWIB’s strong investment performance, WRS retirees will see a Core Trust Fund annuity adjustment of 5.1% and Variable Trust Fund annuity adjustment of 13.0%. SWIB’s above benchmark returns in 2020 produced the most value added to the WRS in more than a decade.
In recognition of staff outperformance, the Trustees awarded incentive compensation payments totaling approximately $21.5 million. Over the past five years, the WRS has retained more than 96% of the value added by SWIB professionals while incentive compensation awards have represented only 3.6% of the value added. Further, the 2020 awards represent 4% of SWIB’s overall costs for managing $144 billion in assets. SWIB’s investment earnings and cost saving strategies have helped the WRS to remain among the best-funded public pension systems in the country. Over the last twenty years, SWIB’s active management and its diversified holdings generated $34.5 billion for the Core Fund above what it would have earned by simply investing in a passive portfolio consisting of 60% global equities and 40% domestic bonds.
In 2020, SWIB beat its one-, five- and ten-year benchmarks for the Core Trust Fund. The one-year net return for the Core Trust Fund, the larger of the two WRS trust funds, was over 15%. The five-year return net of external manager fees was 10.7%, and the ten-year was 8.5%. By exceeding the WRS actuarial target return for both the five- and ten-year periods, SWIB also helps provide continued stability in employer and employee contribution rates.
“We have worked hard to implement a robust investment strategy designed to weather various market conditions and ensure the WRS can meet its obligations well into the future,” Interim Executive Director Rochelle Klaskin said. “SWIB staff stepped up to deliver an extremely strong performance year while successfully navigating the impact of the pandemic on global markets. They stuck to the strategy, identified new opportunities, and put in the extra effort to do whatever was necessary to meet their objectives on behalf of the WRS participants.”
“The market-based incentive compensation plan the Board has put in place allows SWIB to attract and retain top quality staff to successfully implement a sophisticated long-term investment strategy and effectively manage the assets of the WRS at a lower cost than external managers,” said David Stein, chair of the independent SWIB Board of Trustees. “To compete for the most qualified professionals, you must be able to offer competitive compensation. By any measure, this plan is working as expected to the benefit of the WRS and its participants.”
Incentive compensation was awarded to 215 employees and is the pay-for-performance part of employee compensation and is based on an employee’s contributions to overall success of the organization and trust fund performance after deduction of all costs. Incentives are based on delivering value above industry benchmarks set by the Trustees with the help of an outside independent consultant, a practice used throughout the industry. The plan targets total compensation at the median pay of a peer group and primarily focuses on five-year returns, a longer-term measure that aligns with SWIB’s long-term investment strategy and the period used to calculate retiree adjustments. Compensation to SWIB employees provides a considerable cost savings advantage for the WRS over the fees charged by external investment managers. According to an independent cost consultant, SWIB has saved $1.3 billion of costs compared to its peers in the last 10 years.